Corporate Debt: A Slow-Motion Train Wreck

Corporate debt has blown through the roof over the last several years. So much so that the Federal Reserve has issued warnings about the increasing levels of corporate indebtedness.

Borrowing by businesses is historically high relative to gross domestic product (GDP), with the most rapid increases in debt concentrated among the riskiest firms amid weak credit standards.”

But as Brandon Smith of alt-market.com noted in an article published at LewRockwell.com, this is a subject the mainstream media “seems specifically determined to avoid discussing these days when it comes to the economy.

Smith called corporate debt “the key pillar of the false economy.”

It has been utilized time and time again to keep the Everything Bubble from completely deflating, however, the fundamentals are starting to catch up to the fantasy.”

Business debt skyrocketed to a record $16 trillion in 2019. That represents a 5.1% year-on-year, much faster than economic growth. As a result, debt levels have also reached historic highs in terms of percentage of GDP. According to the Federal Reserve report, debt growth has outpaced economic output “through most of the current expansion.”

Smith pointed out that corporations have been using borrowed money for stock buybacks. He called this the single most vital mechanism behind stock market inflation.

Corporations buy their own stocks, often using cash borrowed from each other and from the Federal Reserve, in order to reduce the number of shares on the market and artificially boost the value of the remaining shares. This process is essentially legal manipulation of equities, and to be sure, it has been effective so far at keeping markets elevated.”

Smith said that corporate stock buybacks appear set to decline in 2020. But he doesn’t think this is because companies want to stop using the tactic. The problem is the amount of accumulated debt is outpacing falling profits. Corporate profits peaked in Q3 2018 and have been falling ever since.

Price-to-Earnings ratio, as well as the Price-to-Sales ratio, are now well above their historic peak during the dot-com bubble, meaning, stocks have never been more overvalued compared to the profits that corporations are actually bringing in.”

It’s not just that massive level of corporate debt that is worrisome. Much of the debt is categorized as risky. The Fed report expressed concern about the high level of leveraged loans and what it describes as “weak underwriting standards.” There are more than$1.1 trillion in leveraged loans outstanding. These are loans made to firms already deeply in debt. Think subprime loans for corporations.

A broad indicator of the leverage of businesses—the ratio of debt to assets for all publicly traded nonfinancial firms—is at its highest level in 20 years.”

As Smith points out, this level of borrowing always comes with consequences.

Even if central banks were to intervene on a level similar to TARP, which saturated markets with $16 trillion in liquidity, the amount of cash needed is so immense and the economic returns so muted that such measures are ultimately a waste of time. The Federal Reserve fueled this bubble, and now there is no stopping its demise. Though, they’re behavior and minimal response to the problem suggests that they have no intention of stopping it anyway.”

Peter Schiff has been saying the record stock market valuations have no real connection to the actual economy. He insists stocks really should be coming down and the only thing really supporting them is the Federal Reserve and all the money they’re printing with their QE program. Smith made a similar point.

While corporations, the Fed and Trump have been putting some effort into keeping stock markets from imploding, the real economy has been evaporating. Global import/exports are crashing, US manufacturing is in recession territory, US GDP is in decline (even according to rigged official numbers), US retail outlets are closing by the thousands, the poverty rate jumped in 30% of US counties in the past year, and high paying jobs are disappearing and being replaced with minimum wage service sector jobs.”

Smith called the corporate debt situation a “slow-motion train wreck.” And as he put it, a slow-motion wreck is still a wreck.

The damage can only be mitigated by removing one’s self from the train, and preparing for the fallout.  Do not think that simply because the system has been able to drag it’s nearly lifeless body along for ten years that this means all is well.  All bubbles collapse, and corporate debt has already sealed the fate of the Everything Bubble.”